Inverted Hammer Candlestick Pattern: Definition, Structure, Trading, and Example
The Inverted Hammer Candlestick Pattern is a chart pattern used in technical analysis to find trend reversals. The Inverted Hammer Candlestick Pattern is formed on the chart when there is pressure from the bulls (buyers) to push the price of the asset higher. This pattern is typically observed at the end of the downtrend, and hence it signals a bullish reversal.
The Inverted Hammer Candlestick Pattern gets its name from its upside-down, hammer-like shape. The Inverted Hammer Pattern is identified with the help of its three main components: a long upper wick, a short lower wick, and a small body. The colour of the body is not significant, but it is generally white or green.
The Inverted Hammer Candlestick Pattern suggests a potential trend reversal from bearish to bullish. It directly indicates that bulls are starting to step in and are pushing the price up from the previous downtrend. The long upper shadow in the pattern signifies that the sellers had initially tried to push the price of the assets down but were ultimately defeated by the buyers.
Let’s take an example of hypothetical company ABC’s share price, which is on a downtrend, last closing at ₹150.06. The shares of ABC opened at ₹150.91, with an intraday low of ₹150.52 with a high of ₹153.80 the next day. ABC’s share price closes at ₹151.38, creating an inverted hammer pattern as seen in the image below. The share price increases to ₹156.55 over the next two days, confirming the inverted hammer pattern, which ultimately confirms a bullish reversal.
What is an Inverted Hammer Candlestick?
The Inverted Hammer candlestick pattern is a bullish reversal chart pattern used for technical analysis that forms during a downtrend and signals a trend reversal. The Inverted Hammer pattern is characterised by a single candlestick with a small body and a long upper shadow (wick) that is at least twice the length of the body.
The Inverted Hammer candlestick pattern depicts a situation where the sellers were earlier pushing the price of the assets down, then a position of market uncertainty is created, after which the buyers ultimately push the price of the security up. The pattern resembles an upside-down hammer or an inverted letter “T.” The body represents the hammer’s handle, while the upper shadow acts as the head.
The Inverted Hammer candlestick pattern, just like all the other candlestick patterns, was invented in the Japanese rice trading markets during the 17th and 18th centuries. A very famous Japanese rice trader named Homma Munehisa developed the foundation of the Inverted Hammer candlestick pattern, which later gained popularity worldwide after the 19th century.
Homma Munehisa observed that the price movements of assets were influenced by market emotions and public sentiments. Homma used the visual representation of candlesticks to depict the relationship between the opening, closing, high, and low prices for a given period, because of which trading patterns like the Inverted Hammer were developed.
Candlestick charting techniques were further refined and expanded upon by other Japanese traders and analysts. Western traders and analysts in the 20th century began incorporating these techniques into their technical analysis methodologies.
The Inverted Hammer Pattern reflects a battle between buyers and sellers, with buyers showing strength in pushing the price higher despite initial selling pressure from sellers. The volume of the assets being traded increases significantly during the formation of this pattern.
How is an Inverted Hammer Candlestick Pattern structured?
The Inverted Hammer Candlestick Pattern is structured as a short body at the top of the price range and a long lower shadow, also referred to as the “tail.” There are four key elements to the Inverted Hammer Candlestick Pattern structure.
- Body: The body represents the relative difference between the opening and closing prices of the trading period. The colour of the body, whether green or red, is not as important as its position and length.
- Upper Shadow (Wick): The size of the upper shadow plays a crucial role in the formation of the Inverted Hammer Candlestick pattern. The upper shadow is a vertical line that extends above the body. The size of the wick in most scenarios is twice the size of the body. The long wick indicates that the price of the asset has rallied significantly from the lows and suggests a strong rejection of lower prices.
- Lower Shadow: An inverted hammer’s lower shadow is either nonexistent or extremely brief. It means that there hasn’t been much, if any, price decline during the trading time. The upper shadow’s importance in the pattern is emphasised by the lack of a lower shadow.
- Support and Resistance Levels: The Inverted Hammer pattern is frequently examined in relation to price chart support and resistance levels. The pattern’s possible bullish connotations are strengthened by the fact that it formed close to a critical support level. It shows that buyers are active and trying to raise the price from a crucial support level.
The volume analysis also plays an integral role in confirming the structure of the Inverted Hammer Pattern. Traders usually watch for a rise in trading activity as the pattern develops. Rising volume hints at increased purchasing activity and supports the Inverted Hammer’s potential bullish reversal.
What does Red Inverted Hammer indicate?
The Red Inverted Hammer, also referred to as the Bearish Inverted Hammer, is a variant of the standard Inverted Hammer candlestick pattern with a unique meaning. The Red Inverted Hammer implies a bearish signal, whereas the conventional Inverted Hammer is seen as a bullish reversal indicator.
The Red Inverted Hammer’s upper shadow is very long, signifying the peak price of the asset during that particular period. It demonstrates that despite buyers’ best efforts, sellers ultimately took charge and pushed the price back down.
The body of the Red Inverted Hammer in the pattern is typically coloured red or black, indicating a lower closing price compared to the opening price. The body is observed in various sizes, but it is generally small in relation to the overall candlestick.
What does the Green Inverted Hammer tell?
The Green Inverted Hammer is also known as a Bullish Inverted Hammer, it is a candlestick pattern that suggests a change in the current market trend. The Green Inverted Hammer is the opposite of the Red Inverted Hammer. The Green Inverted Hammer implies a bullish reversal signal, whereas the Red Inverted Hammer is seen as a bearish continuation pattern.
The Green Inverted Hammer is interpreted by traders as a sign of buyer strength and a potential change in momentum. It shows that buyers are entering at lower prices, stopping further declines and perhaps starting an upward trend.
The body of the Green Inverted Hammer is green or white, indicating a higher closing price compared to the opening price. The green body indicates the return of buyers to the market. Traders should also seek additional signs of bullishness, such as subsequent green candlestick formations or breaks of key resistance levels, to confirm the trend reversal taking place.
When does Inverted Hammer Candlestick Pattern occur?
The Inverted Hammer candlestick pattern typically occurs during a downtrend and signals a change in market sentiment. The four main scenarios in which the Inverted Hammer Candlestick Pattern occurs are listed below.
- Bottom of a Downtrend: The Inverted Hammer frequently appears near or at the bottom of a downtrend, signalling that bears have exhausted all of their options and bulls are moving in. It suggests a potential change from a downtrend to bullish market sentiment.
- Support Levels: The Inverted Hammer occurs near significant support levels on the price chart. These levels act as barriers where buyers are more likely to emerge and defend against further downward movement. Its possible bullish implications are strengthened by the pattern’s closeness to a support level.
- Decreasing Selling Pressure: Selling pressure plays an important role in determining the current trend of the market. The Inverted Hammer occurs when the selling pressure starts to weaken. It results in the rejection of lower prices and a potential trend reversal, the selling pressure builds up again indicates the pressure also creates a continuation of the current trend.
- Increased Buying Interest: The appearance of the Inverted Hammer pattern results in increased trading volume, indicating heightened buying interest during its formation. Rising volume increases the chances of the potential bullish reversal signalled by the pattern.
The Inverted Hammer Pattern frequently appears in the above-written scenarios, but there are numerous situations in which this pattern appears.
How often does the Inverted Hammer Candlestick Pattern happen?
The Inverted Hammer is considered a relatively common candlestick pattern, primarily because it appears during downtrends, which are very common in financial markets. The frequency with which the Inverted Hammer Candlestick Pattern happens depends on factors such as the market’s volatility, the timeframe being analysed, and the assets being used for trading.
The Inverted Hammer Candlestick Pattern occurs much more frequently for shorter time frames as compared to longer timeframes. This happens because the occurrence of a continuous downtrend is more common in shorter time frames, such as intraday charts, as compared to daily and weekly charts.
The Inverted Hammer Candlestick Pattern is also frequently observed in the case of volatile assets like cryptocurrencies. Cryptocurrencies are known for their high volatility and price fluctuations, which creates opportunities for the formation of such candlestick patterns.
How to read Inverted Hammer Candlestick Pattern in Technical Analysis?
Reading the Inverted Hammer Candlestick Pattern in Technical Analysis involves various steps like understanding the Inverted Hammer Candlestick Pattern’s construction, evaluating its importance, and taking into account other elements for confirmation. Traders should use the following six steps for reading the Inverted Hammer Candlestick Pattern in Technical Analysis.
- Spot the Inverted Hammer: Check the price chart of the stock for an Inverted Hammer pattern. The pattern is formed at the end of a downtrend with a small body.
- Confirm the Pattern: Confirmation of the pattern is necessary to avoid false signals. This is done by analysing the change in the volume of the assets being traded.
- Understand the Structure: The small body of the Inverted Hammer Candlestick Patterns near the top of the range represents buying pressure, while the long upper shadow indicates selling pressure. The small or inexistent lower shadow suggests that buyers were able to push the price up from the lows. This structure signifies a potential shift from bearish to bullish.
- Consider Trading Volume: Pay close attention to trade volume as the Inverted Hammer pattern develops. Higher volume increases the pattern’s importance by indicating stronger buying demand. It is a sign that traders are not confident in the likely reversal if the volume is low or declining.
- Analyse the Price Action: Keep attention on the price movement that corresponds to the Inverted Hammer pattern. To support the reversal, ideally, a bullish confirmation or ensuing bullish candlestick patterns should appear. Watch for upward price movement to signal that buyers are gaining control.
- Manage Risk: Put effective risk management techniques into practice. To guard against potential losses in the event that the reversal fails, place a stop-loss order below the low of the Inverted Hammer pattern. Depending on the change in position size and risk tolerance.
The effectiveness of all the above-mentioned steps depends upon traders ability to learn and adapt. Traders will benefit the most if they evaluate the effectiveness of the Inverted Hammer pattern in different market conditions and refine their approach based on experience. Trading success depends on consistent practice, analysis, and response to shifting market conditions.
How accurate is the Inverted Hammer Candlestick Pattern in Technical Analysis?
The Inverted Hammer Candlestick Pattern is highly accurate for technical analysis. The accuracy of the Inverted Hammer candlestick pattern in technical analysis varies depending on several factors.
The condition of the market as a whole affects how accurate any candlestick pattern, including the Inverted Hammer The pattern is more dependable in trending markets where it matches the current trend. The Inverted Hammer’s usefulness, however, is limited in choppy or sideways markets.
The Inverted Hammer pattern does provide information about future reversals, but it’s crucial to take risk management strategies into account and not rely exclusively on one pattern when making trading decisions. The accuracy of trading decisions is improved by incorporating additional technical indicators, fundamental analysis, and appropriate risk management techniques.
The accuracy of the Inverted Hammer pattern, like all the other technical analysis patterns, depends on the trader’s skill, experience, and ability to interpret the market sentiments.
How reliable is an Inverted Hammer in Technical Analysis?
The reliability of an Inverted Hammer candlestick pattern in technical analysis is a matter of debate. Some traders believe that it is a reliable indicator of a potential reversal in the trend, while others believe that it is not as reliable as other patterns. An Inverted Hammer is a candlestick pattern that forms after a period of downtrend. It is characterized by a long lower shadow, a small body, and a small upper shadow.
The long lower shadow indicates that sellers were able to push the price down significantly, but buyers were able to rally the price back up and close near the open. Some traders believe that the Inverted Hammer is a reliable indicator of a potential reversal in the trend because it shows that buyers are starting to gain control of the market. They argue that the long lower shadow shows that sellers were unable to sustain the decline, and the small body shows that buyers were able to rally the price back up quickly.
Other traders believe that the Inverted Hammer is not as reliable as other patterns because it is easily faked. They argue that sellers can create an Inverted Hammer pattern by simply selling into a rally and then buying back in at the end of the day.
How to Trade with Inverted Hammer Candlestick Patterns in the Stock Market?
Trading with Inverted Hammer candlestick patterns in the stock market involves a logical approach that considers the pattern’s configuration, confirmation indications, and risk supervision. Traders should use the following five steps for trading with Inverted Hammer Candlestick Patterns in the stock market.
- Find the Inverted Hammer Pattern: Check the price chart of the stock for an Inverted Hammer pattern. It has a small body near the top of the trading range, with a long upper shadow and little to no lower shadow. The pattern should appear following a prior decline.
- Confirm the Pattern: Look for signals that confirm the Inverted Hammer pattern’s potential bullish reversal. Keep an eye out for bullish candlestick patterns, resistance level breaks, and encouraging indications from technical analysis tools like oscillators or moving averages. The accuracy of the pattern is increased by confirmation signals.
- Find Entry and Exit Points: Determine the entry and exit positions for the transaction once the Inverted Hammer pattern has been verified. Entry should be made above the Inverted Hammer candlestick high or upon a confirming bullish candlestick. Place a stop-loss order below the pattern’s low to control risk and guard against potential losses. Establish a profit target using Fibonacci extensions, nearby resistance levels, or a favourable risk/reward ratio.
- Monitor the trade: Traders should keep a tight check on the trade and pay attention to price movement, volume, and any pertinent news or events that are able to impact the movement of the stock. Adjust the stop-loss and profit target levels as necessary, based on shifting market conditions or the performance of the stock.
- Analyse the Results: After the trade is closed, analyse the results. Analyse both profitable and unsuccessful deals to spot trends and gradually enhance your trading approach. Learn from your mistakes and adjust your strategy to suit your personal preferences.
The above-mentioned steps will act as a roadmap for traders willing to trade using the Inverted Hammer Candlestick Pattern in the stock market, but this is not the ultimate strategy, traders should modify the steps as per their needs and convenience. The skill and experience of the trader play a vital role in the execution of all the above-mentioned steps in the stock market.
What is an example of an Inverted Hammer Candlestick Pattern used in Trading?
Let’s look at Company ABC’s daily chart on the Indian stock market. The trader observes an Inverted Hammer candlestick pattern forming on the most recent trading day following a prolonged downturn. The stock had been falling for a few sessions, but on this particular day, it opened close to the session low of ₹100, made a comeback during the day, and closed close to the session high of ₹105. The little candlestick’s body is situated close to the top of the trading range. The trader views this pattern as a possible bullish reversal signal and searches for supporting evidence to support its relevance.
They see that the trading volume on the Inverted Hammer day is higher than the prior norm, indicating more buying activity. The Inverted Hammer pattern is even more significant because the low of the pattern coincides with a key support level at ₹98. The trader chooses to open a long position while limiting risk by setting a stop-loss order below the pattern’s bottom. Based on local resistance levels or a favourable risk-reward ratio, they also determine a profit objective. The trader’s trade hits the profit objective, resulting in a profitable conclusion, as the price rises in consecutive trading sessions, confirming the bullish reversal.
Is an Inverted Hammer Candlestick Pattern Profitable?
Yes, the Inverted Hammer Candlestick Pattern is profitable if used with proper trading strategies. The profitability of the Inverted Hammer candlestick pattern, like any trading pattern, is not completely guaranteed.
The efficiency of the trader’s understanding and execution of the Inverted Hammer pattern, as well as their talent and experience, affect the pattern’s profitability. Profitability is influenced by knowledge of reliable patterns, a comprehension of market dynamics, and the use of effective trading methods.
Its profitability depends mainly on three factors: market volatility, market news, and geopolitical situations. The profitability cannot be solely attributed to the pattern itself.
Is an Inverted Hammer Candlestick Pattern a Bullish Reversal?
Yes, an Inverted Hammer candlestick pattern is generally considered a bullish reversal pattern, but sometimes it also indicates trend continuation. It typically occurs during a downtrend and suggests a potential shift in market sentiment from bearish to bullish, but there are two types of Inverted Hammer Candlestick Patterns in the financial market: the green and red Inverted Hammer patterns.
The green candlestick pattern is the most commonly observed Inverted Hammer pattern; it implies a trend reversal from bearish to bullish. The red candlestick pattern, on the other hand, occurs in a scenario when the bearish trend continues. Both of these patterns occur during a downtrend, but the change in market sentiment is complete.
The general market context, timeframe, and other market elements all affect the Inverted Hammer pattern’s efficacy and dependability. It’s crucial to remember that an inverted hammer pattern by itself does not always ensure a bullish shift. Traders frequently seek out confirmation signals and weigh the significance of the pattern against those of other technical analysis tools and variables. These also include bullish candlestick patterns, breaks of significant resistance levels, or bullish indicators from other technical analysis instruments.
What are the advantages of an Inverted Hammer Candlestick?
The Inverted Hammer candlestick pattern provides valuable insights into potential bullish reversals, but it also has various other advantages that traders should be aware of. Traders should know about the following six advantages of the Inverted Hammer Candlestick Patterns listed below.
- Reversal Indicator: The Inverted Hammer pattern acts as a reversal indicator, during a decline. It signals that the market is headed for a bullish reversal as buyers begin to enter and selling pressure weakens. Early signs of a trend change are provided, enabling traders to foresee prospective opportunities.
- Change in Market Attitude: The Inverted Hammer shows a change in market attitude from bearish to bullish. It demonstrates that purchasers were successful in driving up the price, rejecting lower levels, and perhaps paving the way for an upward movement. Making trading decisions and evaluating market dynamics benefit from this information.
- Confirmation with Other Indicators: The Inverted Hammer is a valuable pattern that is used in combination with other technical indicators or patterns to increase its potency. Traders frequently look for additional positive signs, such as bullish candlestick patterns, trendline breaks, or bullish momentum indicators, to support their trading decisions.
- Applicable to Multiple Timescales: The Inverted Hammer pattern is observed on a variety of timescales, from intraday charts to longer-term charts like weekly or monthly charts. It is used with a variety of trading methods and styles, because of this.
- Entry and Exit Points: Trading professionals frequently employ the Inverted Hammer pattern to pinpoint their entry and exit positions. Traders decide to open a long position after the pattern is verified, anticipating a price reversal. Similarly, the pattern serve as a potential entry point or a reminder to tighten stop-loss orders for open short positions.
- Simple Recognition: The Inverted Hammer pattern is extremely simple to recognise on price charts due to its distinctive visual look. It stands out due to its distinctively lengthy upper shadow, short body, and minimal to no lower shadow, which helps traders spot probable bullish reversal opportunities.
The pattern has been widely recognised as a reliable signal for potential bullish reversals in various markets and timeframes. Traders find it very helpful because of its clear visual structure, which makes it easily identifiable on price charts. All these advantages make this pattern versatile, because of which it is used in various assets like cryptocurrencies, forex, and currencies.
What are the disadvantages of an Inverted Hammer Candlestick?
The Inverted Hammer candlestick pattern does provide valuable insights into potential bullish reversals, but it also has some disadvantages that traders should be aware of. Traders should know about the top four disadvantages of the Inverted Hammer Candlestick Patterns listed below.
- False Signals: The Inverted Hammer pattern is not completely perfect, and it does generate false signals, just like any other technical analysis tool. Traders run the risk of losing money if they base all of their trading choices only on the pattern when a pattern develops but the anticipated bullish reversal doesn’t occur. It’s crucial to take into account additional variables and confirmation signs, before making trading decisions.
- Lack of Clarity: The Inverted Hammer pattern doesn’t offer clear entry or exit points, but it does give a general indicator of a bullish reversal. Traders still need to apply additional technical analysis tools like trendlines, support and resistance levels, or oscillators to find the best entry and exit points and efficiently manage risk.
- Limited Timeframe Suitability: The Inverted Hammer pattern’s dependability varies depending on the chosen timeframe. It is more or less dependable, depending on the market or period. The timeframe a trader is using for analysis, along with other technical elements and the general market trend, should all be taken into account.
- Subjectivity and Interpretation: The Inverted Hammer is one of the candlestick patterns that requires some subjective interpretation. Traders have divergent views on the importance and dependability of the pattern, as a result of diverse interpretations and potential discrepancies in trading decisions. The pattern’s context within the larger technical analysis framework should be understood clearly.
Most of these limitations are avoidable by proper implementation of the trading strategies, like observing the spike in volume during pattern formation and understanding support and resistance levels.
What are other types of Candlestick besides Inverted Hammer?
There are numerous other types of candlestick patterns commonly used in technical analysis to interpret market sentiment. Traders should be aware of the following five other types of Candlestick besides Inverted Hammer.
- Doji: A Doji candlestick has a small body and signifies that the price at the open and the price at the closure were nearly identical. It indicates a potential trend reversal and shows market indecision.
- Engulfing: The body of the second candle completely engulfs the body of the first candle in the engulfing pattern, which consists of two candlesticks. A bearish engulfing pattern develops during an uptrend and indicates a potential bullish reversal, whereas a bullish pattern develops during a slump.
- Morning Star: The Morning Star is A three-candlestick pattern.. There is a long bearish candle at the beginning, a little bullish or bearish candle in the middle, and a long bullish candle at the end. It suggests a possible positive reversal following a downturn.
- Evening Star: The reverse of the Morning Star pattern is the Evening Star pattern. Long bullish candles open the chart, which is followed by little bullish or bearish candles, and lengthy bearish candles close it. It suggests a possible bearish reversal following an advance.
- Shooting Star: The Shooting Star pattern features a short body near the bottom of the pricing range, a lengthy upper shadow, and little to no lower shadow. It occurs during an uptrend and suggests a potential bearish reversal.
These are only a few instances of candlestick patterns; technical analysis makes use of many more variants and combinations. Traders frequently research and evaluate these patterns, in addition to other indications, to make wise trading decisions.
Is a Shooting Star the Same as An Inverted Hammer?
The Shooting Star and Inverted Hammer candlestick patterns each have unique traits and technical analysis implications, despite their initial similarities.
The Shooting Star pattern indicates a possible negative reversal, as it appears during an uptrend. It means that after buyers first drove the price up, sellers regained control and drove the price back down. It denotes a change in the state of mind of the market and potential selling pressure.
The Shooting Star pattern has a small size body at the lower end of the price range, with a long upper shadow and little to no lower shadow. The colour of the body is either red or green, as the colour of the body does not play a major role in the pattern.
The Inverted Hammer pattern is formed at the bottom of the downtrend and suggests a potential bullish reversal. The Inverted Hammer pattern indicates that the bears initially pushed the price lower, but the bulls managed to regain control and push the price higher. It signifies a shift in market sentiment from bearish to bullish and potential buying pressure.
The inverted hammer pattern has a small body, a long upper shadow, and little to no bottom shadow, near the top of the pricing range. The body of the inverted hammer pattern is generally red indicating a lower closing price than the opening price.
There are three major differences between the patterns including the colour of the body, the position of the formation and the direction of change in market sentiment.
Join the stock market revolution.
Get ahead of the learning curve, with knowledge delivered straight to your inbox. No spam, we keep it simple.